Is It Finally Time to Abandon Ship in These Educators?

It's going down, Fools. Now may be the time to bail.

For a while now, for-profit education has been under intense scrutiny. Many hoped it'd go the way of the banking industry -- fix its issues and come out swinging. But that doesn't seem to be happening. And the latest news is anything but good.

Is for-profit a sinking ship? On Jan. 8, ApolloGroup(NASDAQ:APOL) released its latest quarterly results: Degreed Enrollment at the University of Phoenix fell 14.3% compared to this same time last year, and New Degree Enrollment fell 15.1%. Additionally, the Higher Learning Commission is reviewing the University of Phoenix cohort default rates, and could rescind its accreditation based on findings.

Add to that news from Apollo's latest annual report, and you can see that Apollo isn't doing so hot: The University of Phoenix had a two-year cohort default rate of 17.9% in 2010. That's a decrease from 2009's 18.8%, but is up from 2008's 12.9%. Moreover, Apollo reported that the cohort default rate has "increased materially over the prior several years."

Not the only one drowning Apollo isn't the only one facing scrutiny for its cohort default rates. Corinthian Colleges (NASDAQ:COCOQ) and the WashingtonPost's (NYSE:GHC) Kaplan University are coming under fire from the feds.

Both Corinthian and Kaplan have made interesting efforts to entice their students not to default on loans: Corinthian went door-to-door handing out McDonald's gift certificates and information about "postponing payments," and Kaplan hired a private investigator to find former students and get them to sign delayed payment forms -- but as of yet, it has't been enough.

Plus, these shenanigans have caught the attention of a group of senators, and they have asked the Department of Education to look into this matter, and see if these schools are manipulating government regulations.

Adding insult to injury is this: For its latest three-year measurement period, Corinthian Colleges had a consolidated average cohort default rate of 28.8%. The largest Kaplan school, Kaplan University, reported a three-year cohort default rate of 25.9%. The fact is, the average three-year cohort default rate for for-profit education is 22.7%. That's more than double the next highest default rate of 11% for public education.

Why this mattersThe reason this is bad is that according to federal regulations, "any institution whose Cohort Default Rates equal or exceed 25% for three consecutive years under the current calculation may lose eligibility to participate in the FDL and the Pell grant programs for the remainder of the federal fiscal year ... and for the two subsequent federal fiscal years."

Additionally, institutes that exceed a 25% cohort default rate for any one of the three most recent federal fiscal years could be found to be in violation of the Title IV program requirements. As many for-profit schools derive a large amount of their revenue from Title IV, loosing eligibility for this program would be catastrophic.

Island in the sea? The for-profit sector is what banks were a few years ago: not pretty. Yes, there may be a few for-profit institutes that aren't facing the same problems as the ones listed above, but because they're for-profit, they're getting that negative stigma. Overall, this is a sector I'm avoiding.

Author

Katie Spence has been a financial journalist for The Fool since 2011. She specializes in defense companies, “green" technology, autos, and robots. Follow me on Twitter for breaking news in the defense, auto, and robot industry. Follow @tmfkspence